Japan's experience of financial deregulation since 1984 in an international perspective

Introduction

One of the characteristics of the international financial markets over the last few years has been the growing prominence of Japanese financial institutions. During this period Japan has experienced both huge current-account surpluses and enormous long-term capital outflows (see Table I). Japanese financial institutions have played a key role in the recycling of this capital, and financial deregulation in Japan since 1984 has greatly facilitated their doing so.

1984 was an epoch-making year for the Japanese financial markets. In that year the United States and Japan reached an agreement on a wide range of liberalisation measures (US-Japan accord), and financial deregulation has advanced rapidly since then. It is true that financial deregulation in Japan actually started before 1984, and may be traced back to at least the mid-1970s. But it was in 1984 that this issue became truly urgent in the sense that the Japanese authorities committed themselves for the first time to a specific time schedule. As a result, financial deregulation since 1984 can be viewed as being quite different in terms of its pace of progress from that in the pre-1984 period, when the authorities had followed a "gradualist approach".

In bilateral talks between the Japanese Finance Minister and the US Treasury Secretary in 1983, Japan had agreed to take further action in order, firstly, to promote the internationalisation of the yen, secondly, to deregulate the Japanese capital and financial markets, and, thirdly, to help strengthen the yen. The two countries also agreed to set up a special committee (the Yen/Dollar Committee) with the aim of following up the joint undertakings and investigating the possibility of additional deregulation measures. In this Committee's discussions, Japan showed reluctance to overhaul its traditional financial system completely, but the United States pressed very hard for comprehensive deregulation. The findings of this Committee were published in May 1984 in a paper entitled "Report on yen/dollar exchange issues" and formed the basis for the aforementioned agreement between Japan and the United States. As indicated by the title of this Committee's report, exchange rate considerations were the most important among a number of issues. Admittedly, what had so hardened the attitude of the United States was irritation regarding the alleged "insularity" of the Japanese financial markets, which the United States rightly or wrongly considered to be a major factor behind the continued appreciation of the dollar vis-à-vis the Japanese yen. At the same time the deterioration of the US current-account balance was already obvious enough to foster protectionist sentiment in the US Congress. Given these factors on the US side of the argument, the various deregulation measures agreed on in the US-Japan accord can be viewed as being US-instigated. It is true that the Japanese financial authorities at that time had already realised the necessity of liberalising the financial markets in accordance with the worldwide trend towards financial deregulation and had actually taken various measures towards that end. However, it is clear that the pace of financial deregulation in Japan would have been considerably slower had it not been for US pressure and the resultant US-Japan accord.

It may be noted that, while the original intention of the US-Japan accord had been to support the yen against the dollar by encouraging the international use of the yen, in the event it had a very different impact. After the dollar had turned around in 1985 the Japanese deregulation measures helped to sustain capital flows to the United States and to curb any excessive weakness of the dollar.

The main objective of this paper is to survey the financial deregulation that has taken place in Japan since 1984 and at the same time to highlight some basic features of Japan's traditional financial system. The first part of this paper describes the various deregulation measures which have been implemented since 1984, covering not only what was promised or intended in the US-Japan accord but also steps which have been taken independently of the accord. The main emphasis is on measures affecting the international role of the Japanese financial system, but domestic aspects of deregulation are also covered to the extent that they have major international implications. The second part of the paper analyses the impact of deregulation on the development of Japanese financial markets and examines the consequences for the Bank of Japan's conduct of monetary policy.